Abstract
Cash holding is important for Chinese manufacturing firms coping with the increasing costs of financing and tough economic conditions. This study examines the impact of cash holding on the firm value of Chinese manufacturing businesses. We found evidence that a non-linear relationship exists between cash holding and firm value in these companies. The study reveals that a higher level of cash holding in financially constrained firms negatively affects the firm value, while unconstrained firms with a less cash holding level have a better firm value. Finally, this research is enriched by implementing the novel measure of managerial optimism. Revealed is the interactive role of cash holding and optimism and how they affect firm value. The study concludes that managerial optimism influences a firm’s cash holding decisions, and this is more costly for unconstrained firms.
Highlights
The increasing trend of corporate cash reserves has attracted the attention of researchers and policy-holders in recent times
The purpose of this study is to examine the effect of cash holdings on firm value in financially constrained and unconstrained firms
This study aims to analyze the influence of cash holding on firm value in the context of managerial optimism
Summary
The increasing trend of corporate cash reserves has attracted the attention of researchers and policy-holders in recent times. Twenty years ago, Dittmar et al (2003) identified the existence of US$1.5 trillion cash reserves in the world’s largest organizations at the end of 1998. In their analysis, Bates et al (2009) recognized the US$2.80 trillion cash reserves in the world’s top 1000 non-financial corporations. Bates et al (2009), they identified cash holding reserves increased by 46% per annum from 1980 to 2006 in U.S firms. Since 1996, the M2 of China has surpassed by 75% of the M2 provided by the U.S, Europe, and Japan. In 2009, China’s M2 as measured in U.S dollars surpassed that of the U.S for the first time (Caldentey 2017)
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